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Calculate the new stock price using the npvgo model

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Trident Inc.'s current business generates a constant stream of earnings per share of $5 currently, if no new investment is undertaken. Suppose the management will retain 40% of its earnings at Year 1, and invest the retained earnings in a project. For each dollar invested, the new investment will generate a return of 30% per year for only the next three years (Year 2, 3, and 4). Then the new project will end. The discount rate is 10%.

-Suppose the company doesn't take any new investment. What is the stock price?

-What are the dividends at Year 1, 2, 3, 4, and 5? What is the dividend growth rate for Year 2? And for Year 3?

-The company just announced to undertake the new project. Calculate the new stock price using the dividend discount model.

-Calculate the new stock price using the NPVGO model.

-Suppose you are the company's CEO, who can change the scale of investment for the new project. How much earnings would you retain and invest at Year 1, if your goal is to maximize all shareholders' value? Explain.

Reference no: EM132564542

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